Order your essay today — written by real experts, guaranteed plagiarism-free, and ready to impress your professor!
This unit is a general introduction to the field of public finance, emphasizing the relationship between individuals and government. The functions of government are outlined, and the importance of taxes in household budgets is highlighted. The textbook will aid you in developing an understanding of the economic role of government as a supplier of useful goods and services. You are also expected to digest data on the actual extent of government activity in the United States and in other nations. You should know the current structure of government expenditures and revenues in the United States, how government has grown since 1920, and how the structure of federal government spending has changed since 1960.
Chapter 1 demonstrates that the problem of scarcity implies that an increase in resources devoted to government goods and services decreases availability of resources for nongovernment uses. It also makes clear how government provision of goods and services differs from market provision of goods and services.
Need Help Writing an Essay?
Tell us about your assignment and we will find the best writer for your paper.
Write My Essay For MeThe main objective of this unit is to develop the concept of efficiency and show how it is used to evaluate economic performance. To begin the discussion, it is necessary to draw the distinction between positive and normative economics. Both of these approaches and their usefulness are discussed in Chapter 2.
The concept of efficiency is carefully linked to resource allocation and economic transactions. Chapter 1 introduces marginal analysis of resource allocation.
Reading Assignment
Chapter 1: Individuals and Government
Chapter 2: Efficiency, Markets, and Governments
Supplemental Reading
Click here to access a PDF of the Chapter 1 Presentation.
Click here to access a PDF of the Chapter 2 Presentation.
Key Terms
- Compensation criteria 2. Efficiency criterion 3. Government goods and services 4. Government purchases 5. Government transfer payments 6. Marginal conditions for efficient resource allocation 7. Marginal net benefit 8. Marginal social benefit 9. Marginal social cost 10. Nonmarket rationing 11. Normative economics 12. Positive economics 13. Total social benefit 14. Total social cost 15. Utility-possibility curve
MBA 6871, Public Finance and Legislative Procedures 2
Chapter 2 draws distinction between total social cost and benefit and marginal social cost and benefit. Graphic analysis is then used to derive the marginal conditions for efficiency. The objective is to show that maximization of net social benefit requires that all activities be undertaken in each time period up to the point at which marginal social benefit = marginal social costs (MSB = MSC).
For example, the U.S. federal government’s spending, along with thousands of local government’s spending, approached nearly $2 trillion in 2008. Government spending is categorized by government purchases and government transfers. For government purchases, a government uses productive resources from private sections to supply education, national defense, and infrastructure, for instance. Government transfers refer to personal income that recipients receive without a requirement to perform service(s) in return for the income. Examples of government transfers include unemployment benefits, healthcare programs, food stamps, and Social Security benefits. Government expenditures have grown in percent of GDP since 1929. The biggest portion of the government expenditure is for health programs, followed by national defense and social securities and other retirement pensions.
The issues between efficiency and equity have always been a contentious political debate. Efficiency means that society is getting the most it can from its scarce resources. A more efficient society can produce more with the same amount of resources as another. Equity means that the resources are distributed fairly and equitably among individuals. We can view efficiency as the size of a pie and equity as how evenly the pie is being divided.
When government policies are being made, there is always a conflict between the two goals because we have to sacrifice one in order to gain the other. Now begins the idea of tradeoffs. In order to get one thing, we usually have to give up something else. For example, if we spend more time on the job, we will have less time to spend on leisure. If we sleep more, we will have less time to study. Efficiency and equity is, in fact, one of the biggest tradeoffs that a society will face. When government designs its policies, it has to make sure that society is making the maximum use of its scarce resources while also making sure that the distribution of the benefits received by using the resources is divided somewhat evenly among the citizens. The government provides transfers as a means of investments to create future income gains. Using this theory, the government should reduce marginal tax rates for the wealthy. An example would be when the rich expand their businesses and hire more workers, thus increasing the total size of the “pie.”
Although we know that there is a direct tradeoff between efficiency and equity, the magnitude of the tradeoff is hard to measure as it gets smaller and is divided evenly. If the government collects everybody’s income and redistributes it evenly, regardless of their original income, it would destroy everybody’s incentive to work. An in-kind transfer, such as health care and higher education opportunities, will reduce future health problems and provide the poor with an opportunity to escape poverty. This will produce greater future returns. However, there are arguments against this view. The lack of incentive to work will impede the normal economic growth. Nevertheless, this is not likely to work in reality because it is difficult to get the funding to support the redistribution efforts when the government is running a budget deficit. Even if the total utility will be maximized by perfect equity, a society can never reach the point of perfect equity simply because people respond to incentives.
This unit provides the basis for analyzing resource allocation in competitive markets that operate under conditions of perfect competition with no externalities. Further, this is followed by examples showing how monopoly
MBA 6871, Public Finance and Legislative Procedures 3
power and government intervention can result in a loss of efficiency in markets. The objective here is to show how welfare triangles can be used to measure losses in well-being when efficiency is not achieved. This analysis has important real world application in regard to government involvement in markets (anti-trust, utility pricing, etc.)
